UCLA Anderson Forecast: Economy on the road to 'normal'
By UCLA Newsroom September 12, 2013 Category: Research
In its third quarterly report of 2013, the UCLA Anderson Forecast asserts that the U.S. economy is "returning to normalcy." And while the economy will not be normal by historical standards, it will be noticeably better than in recent years.
After growing at a now-revised 2.5 percent rate in the second quarter of 2013, real GDP growth will continue at 2.5 percent for the rest of the year before rising to its historical 3 percent in 2014 and 2015, Forecast economists say.
In California, the economy continues to mirror the slow growth of the nation. The forecast calls for total employment growth — including payroll, farm and the self-employed — of 2.7 percent in 2013, 2.1 percent in 2014 and 2.1 percent in 2015. Non-farm payroll employment will grow more slowly, at 1.7 percent, 1.9 percent and 2.2 percent for the three forecast years.
The national forecast
UCLA Anderson Forecast senior economist David Shulman says that while the economy is returning to normal, it is still operating well below what would have been expected prior to the recession. As an illustration, he cites a report from Sentier Research showing that the current median household income is lower than it was in June 2009, the final month of the recession.
In an essay titled "Returning to Normalcy, Sort Of," Shulman writes that payroll employment growth will be a sustained 200,000 jobs per month through 2015 and that the unemployment rate will steadily fall to 6.5 percent by the end of the three-year forecast period.
In the near-term, the adjustments business firms will make as a result of the implementation of the Affordable Care Act could negatively affect the quantity and quality of the net increases in employment; companies may convert full-time employees to part-time, and smaller businesses may seek to limit their headcount to 50 full-time employees.
The Anderson Forecast continues to believe that the housing recovery is underpinned by a five-year period of underbuilding, rising household formations, improved employment and still-low (by historical standards) mortgage rates. As to the latter, the fear of higher rates in the future makes the current rate environment more attractive to buyers. The result is a forecast that calls for housing starts to increase to 965,000 units this year, compared with 783,000 last year. This is actually a reduction from previous forecasts, due to a slower ramping up of production than originally envisioned.
The forecast calls for a return to normal growth on the order of 3 percent in 2014 and 2015, a percentage-point higher than the 2 percent growth rate the economy has experienced since the recession ended. It also sees an end to the very low interest rates we have become accustomed to the past few years. While a resumption of normal growth is a good sign, Shulman does caution that it will not be enough to restore the economy to its pre-recession growth path.
The California forecast
The California forecast report, authored by senior economist Jerry Nickelsburg, examines the recovery in employment in California, both by geography and sector. The economic news coming out of the state is relatively bright when compared to the rest of the United States, but California's recovery is not an equal one — the economy is divided both by geography and skill-class.
In a report titled "Where Are the Jobs, California?", Nickelsburg notes that coastal economies in California that are driven by investment, technology and trade have outperformed the U.S. as a whole. Conversely, the inland economies that are driven by migration, construction and government have stagnated.
The data from the past 12 months reveals a pattern similar to that of the previous three years. Employment in the Bay Area, Orange County, San Diego and Ventura has consistently grown at a faster rate than the country as a whole. Los Angeles and the mid-coast, after a slower start, have seen employment growth at about the anemic national rates. But the Sacramento Delta, the San Joaquin Valley and the Inland Empire, absent the primary drivers of economic growth, continue to fall further behind the rest of the state.
Viewed through the prism of skills, California continues to add jobs, but only a few sectors are taking off. This, Nickelsburg says, is the fly in the ointment of the state's recovery. Californians who invested in and developed skills in the growth sectors of the 20th-century economy are now finding that some of those same skills are not applicable to the 21st-century economy. Those sectors producing job growth in California now require a different set of skills.
While a larger proportion of the inland workforce is impacted by this structural change, coastal communities are affected as well. For example, prior to the recession of 2008–09, Los Angeles employment was relatively diversified across employment sectors. Now, some parts of the county are doing quite well and others quite poorly, which is generating aggregate economic data that is mixed at best.
Real personal income growth is forecast to be 1.9 percent in 2013 followed by 3.3 percent in both 2014 and 2015. Unemployment will fall through 2013 and will average approximately 8.9 percent for this year. In 2014, the Anderson Forecast expects the unemployment rate to drop to 7.9 percent on average — three percentage-points higher than the U.S. forecast — and then to 6.9 percent.
In a companion piece titled "The Evolution of Human Capital, Workforce, and Innovation in Los Angeles Over the Past Two Decades," UCLA Anderson economist William Yu provides an update to the human capital index research he has been conducting for the past year. Among his conclusions are that Los Angeles' human capital has been falling behind other major cities at a time when those cities have seen theirs rise; that a high level of human capital will predict high levels of income and is correlated with high innovations; and that an investment in the early childhood education of disadvantaged children could be one of the most efficient and effective ways to achieve vibrant growth and shared prosperity in our city.
The UCLA Anderson Forecast is one of the most widely watched and often-cited economic outlooks for California and the nation and was unique in predicting both the seriousness of the downturn in California in the early 1990s and the strength of the state's rebound that began in 1993. The Anderson Forecast also was credited as the first major U.S. economic forecasting group to declare the recession of 2001.
The UCLA Anderson School of Management, founded in 1935, is regarded among the very best business schools in the world. UCLA Anderson faculty members are globally renowned for their teaching excellence and research in advancing management thinking. Each year, UCLA Anderson provides a distinctive approach to management education to more than 1,800 students enrolled in its M.B.A., fully-employed M.B.A., executive M.B.A., global executive M.B.A. for Asia Pacific, global executive M.B.A. for the Americas, master of financial engineering, doctoral and executive education programs. Combining selective admissions, varied and innovative learning programs, and a worldwide network of 35,000 alumni, UCLA Anderson develops and prepares global leaders.